Do I still pay taxes on the capital gains even if I have them reinvested?

Unless shares are held in an IRA, 401(k) or another tax-deferred investment capital gain distributions are taxable, even when reinvested. You can change the manner in which you receive capital gains by visiting My Armada Account or notifying the Fund in writing prior to the record date. If you have questions about your individual situation, contact your plan administrator or a personal adviser, such as an accountant, attorney or other tax professional.

How are interest and dividends taxed?

Mutual funds hold securities that may pay interest or dividends or both. Mutual fund dividends are paid on a regular basis: monthly, quarterly, or annually. You can choose to accept them in cash or reinvest them to buy additional shares. These distributions are taxed as ordinary income. Ordinary income distributions may also include short-term capital gains realized by the fund. If you have questions about your individual situation, contact your plan administrator or a personal adviser, such as an accountant, attorney or other tax professional.

How do distributions affect a fund’s Net Asset Value (NAV)?

As a fund’s profits accumulate during the year, its NAV and share price will rise. When gains are paid out to shareholders, a Fund’s NAV will be reduced by the amount of the distribution. Example A shareholder owns 100 shares valued at $10/share on the record date. The account is worth $1,000. The Fund distributes capital gains equal to $2 per share or $200. As a result, the Fund’s NAV will fall to $8 per share on the ex-dividend date. The shareholder now owns 100 shares valued at $8 per share to total $800. When the $800 account value is added to the $200 in dividends the total account value is $1,000. If you reinvest the distribution, as many shareholders do, the number of shares in your account will increase and the total value of your account will remain constant. Capital gains are automatically reinvested unless you have specified otherwise. If you have questions about your individual situation, contact your plan administrator or a personal adviser, such as an accountant, attorney or other tax professional.

What is a capital gain?

Capital gains are profits from the sale of securities. A mutual fund investor may realize capital gains when a Fund sells securities or when you sell shares of a Fund or when both occur. When the Fund sells securities, the capital gains realized are passed through to shareholders as distributions. These amounts are reported to you and the IRS on Form 1099-DIV. When you sell or exchange mutual fund shares, you may realize a short- or long-term taxable capital gain or a capital loss. Current federal tax laws require that shares held for more than one year receive long-term capital gain or loss treatment, while shares held for less than one year receive short-term capital gain or loss treatment. Some states provide additional breaks on capital gains. Please consult your tax advisor for information regarding state-specific information. Redemptions of mutual fund shares are reported to you and the IRS on Form 1099-B. If you have questions about your individual situation, contact your plan administrator or a personal adviser, such as an accountant, attorney or other tax professional.

What is a qualified 5-year gain?

A qualified 5-year gain occurs when a security has been held by a mutual fund for more than five years prior to being sold. In these cases, an 8% capital gains rate may apply for taxpayers in the 15% tax bracket. The qualified 5-year gain will also apply to individuals in tax brackets higher than 15% after 2006. If you have questions about your individual situation, contact your plan administrator or a personal adviser, such as an accountant, attorney or other tax professional.

What is the difference between a long-term gain and a short-term gain?

Long-term gains are gains on securities that are held by the fund for more than 12 months. Long-term capital gains are taxed at 20% for shareholders whose federal tax bracket is 28% or higher, and 10% for those in the 15% tax bracket. Short-term gains are gains on securities that are held for one year or less. Short-term gains are taxed as ordinary income at the taxpayer’s appropriate tax rate. Shareholders should consult a tax advisor to determine the tax implications for their situation. If you have questions about your individual situation, contact your plan administrator or a personal adviser, such as an accountant, attorney or other tax professional.

What is the 2003 tax cut I am hearing about?

President Bush signed the Jobs and Growth Reconciliation Act of 2003 into law in May. It’s the third largest tax cut in U.S. history, expected to benefit 136 million taxpayers. The major benefits for most taxpayers are:

• An increased child tax credit, with advance payment checks being mailed to eligible taxpayers
• Reduced tax rates on dividends and capital gains
• “Marriage penalty” tax relief
• Lower income tax rates for most taxpayers

If you have questions about your individual situation, contact your plan administrator or a personal adviser, such as an accountant, attorney or other tax professional.

The new tax law has sunset provisions that will expire unless Congress extends the law.

Armada Funds, National City Investment Management Company, Professional Funds Distributor, and their affiliates do not render tax advice. For tax advice specific to your situation, please consult your tax advisor. Past performance is no guarantee of future results. Mutual funds involve risk, including possible loss or principal. Shares of Armada Funds are not insured by the FDIC, are not deposits or obligations of, or guaranteed by the bank, and involve investment risk.

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